What does the SEC's new policy entail? The Times says that the SEC will start today by focusing on "what policies brokerage firms have in place to prevent the passing of false information. The intent is to stop malicious rumors without hampering the natural exchange of information in the marketplace." I am not a lawyer but it sounds like the SEC will have a tough time monitoring all the exchanges of information among those on Wall Street unless it plans to record every cell phone, land-line, e-mail, IM, and Blackberry exchange all around the world.
Meanwhile, it seems that the government has strained to distinguish between fact and fiction when it makes big policy decisions. For instance, last year Hank Paulson and Ben Bernanke were saying that the subprime problem was "contained." Would the SEC indict Paulson and Bernanke for spreading false rumors intended to manipulate stock prices? After all, their statements -- which are clearly false -- may have had the effect of causing investors to buy stock in non-subprime mortgage lenders. Could they get off the SEC's hook by proving they had no intent to manipulate stock prices?
Now that the government is going into the open market to buy stock in Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) the SEC will need to examine closely the puffery coming out of the Treasury and Fed to boost the government's investments. Will it really haul Paulson and Bernanke into court if it turns out that their cheerleading proves false?
Or is the SEC's new policy intended only for those who would dare to sell short? The good news here is that the SEC is so starved for resources that it will have a very difficult time actually enforcing this ridiculous policy. And it will merely drive market participants to find a way to communicate that is outside the spying skills of the SEC.
I'm a big believer in honest information exchange -- but the SEC should apply that policy to those who lie about how great things are when they're really falling apart as well. Unfortunately, that won't happen because cheer-leading seems to be a requirement for holding high office.